20200622Cary Direct.pdf

Michael C. Creamer (ISB No. 4030)
Preston N. Carter [ISB No. 8462)
Givens Pursley LLP
601 W. Bannock St.
Boise, D 83702
Telephone: [phone]
Facsimile: (208) 388-l 300
mcc@ sivensoursley.com
pnc@ sivenspursley. com
Attorneys for SUEZ Water ldaho Inc.
BEFORE TIIE IDAHO PUBLIC UTILITIES COMi\{ISSION
IN THE MATTER OF THE PETITION OF
SUEZ WATER IDAHO, INC. FOR
AUTHORIZATION TO ELIMINATE
COLLECTION OF GROSS-UP PAYMENTS
ASSOCIATED WITH CONTRIBUTIONS
IN AID OF CONSTRUCTION
CaseNo. SUZ-W-20-01
DIRECT TESTIMOI\TY OF JARMILA CARY
ON BEHALF OF SIIEZ WATER IDAIIO INC.
JUNE 22,2020
RECEIVED
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Please state your name and business address.
My name is Jarmila Cary. My business address is 8248 West Victory Road,
Boise,Idaho 83709.
By whom are you employed, and in what capacity?
I am the Director of Finance and Customer Service for SUEZ Water Idaho lnc.
("SUEZ" or "Company").
Please summarize your professional experience and educational background.
I was granted a Bachelor of Science in Business, with a major in Accounting,
from the University of ldaho in December 1996.I have been employed by SUEZ
since June 1997 as Senior Accountant and later as Manager of Accounting except
for a brief leave of absence from June 2008 through August 2009. I became
Director of Finance in September 2015. In March 2018 my role expanded to
include oversight of Customer Service.
Please describe your duties as Director of Finance and Customer Service.
I have oversight over the Company's financial activities including planning,
variance analysis, operational reporting, payroll, accounts payable, and
development and monitoring of business metrics. I participate in rate filings,
monitor capital expenditure investment, and define and implement changes in
management initiatives. I am also the key contact person within SUEZ's Idaho
Division for centralized functions such as Accounting, Audit, Tax, Treasury and
Procurement. In March 2018, my role expanded to include oversight of the
Customer Service department, including billing functions, call center, meter
reading, customer service field work activities, cashiering, etc. Additionally, I
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provided testimony before the ldaho Fublic Utilities Commission in the
Company's 201I and 2014 general rate cases,20l8 filing for approval of sale and
acquisition of Eagle Water Company, and 2019 filing for exemption from Utility
Customer Relation Rules 311(4) and (5) related to customer contact requirements,
accepting payments during disconnection, and eliminating customer convenience
fees.
What is the purpose of your testimony?
The purpose of this testimony is to support and further describe SUEZ's proposal
to no longer collect the federal and state income tax gross-up amount related to
Contributions in Aid of Construction (CIAC).
Would you please summarize your testimony?
My testimony describes contributions in aid of construction (CIAC), the tax
gross-up component of CIAC, how this historically has been treated for rate-
making and corporate income tax purposes, the 2017 Federal Tax Cuts and Job
Act which eliminated the exemption from income taxation on CIAC for water
utilities, the Company's proposed changes, and the associated impact to
customers.
Would you please explain what CIAC is?
Contribution in Aid of Construction (CIAC) is a cash payment, or services or
property received from a person, business or govemmental agency, provided at no
cost to a regulated public utility for facility construction purposes. CIAC
contributions are collected and used by the utility to offset the costs in excess of
the utility's approved cost for expansion, improvement, or replacement of the
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water facilities to provide service to new customers through a water main
extension or for special facilities associated with providing service to a non-
contiguous (isolated, not inter-connected) water system, or certain other
circumstances. Contributed payments or property are categorized as a "CIAC
Contribution" or an "Advance." As a result of the recent tax law changes, starting
in 2018 both CIAC and Advances were again included as taxable income to water
utilities. While CIAC contributions for water distribution facilities (water main
line extensions) are non-refundable, Advances relate to source of supply, storage
and booster pumping facilities (ie. construction of a new well). Advances also are
partially refundable to the party who requested seruice (if that party has
completed a Special Facilities Agreement allowing for refunds) because these
facilities expand the utility's capacity to serve additional customers. The amount
of the original Advance refunded per customer connection is based on the formula
outlined in the utility's tariff and the refund occurs as customers connect to
receive service during the term of the agreement. SUEZ's agreements for
advanced property are for a l5-year period. Un-refunded Advances for
construction convert to CIAC at the expiration of that term and remain on the
books of the utility as a permanent reduction to the rate base investment.
CIAC is collected as a utility company receives customer requests for
infrastructure additions to provide service to customers that cannot be serviced
economically. For example, the additional revenue requirement resulting from the
cost of connecting water pipes to a remote location would likely exceed the
revenues that would be recovered from the customers served through existing
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rates. As utilities cannot recover the projected costs by raising utility prices (either
at the individual or the collective level) absent approval by the public utility
commission, customers requesting uneconomic services must make an upfront
payment for the cost of the project. CIAC is collected from the developer, home
builder, or customer to prevent existing customers from incurring excess costs
required for connecting new customers. The CIAC amount is determined using a
methodology as defined in the utility's tariff. The utility maintains control of the
contributed infrastructure along with responsibility for its maintenance and
operation. In addition, an estimated amount of CIAC for a water main extension is
paid upfront by the party requesting utility service for later ffue-up after
completion of the construction project.
Where in SUEZ's tariff are developers required to provide facilities for
extension of service?
SUEZ's Tariff includes provisions for Special Facilities, which state:
74. Special facilities shall include source of supply, storage, and booster pumping
facilities which may be required to render adequate water service to an area for
which such service has been requested. Special facilities to not include
transmission or distribution line facilities.
75. Should an Applicant propose a Residential, Commercial, Industrial or
Municipal Development requiring a special facility or special facilities, the
Applicant shall advance the cost of such facility or facilities.
For individual residential customers when a company water main does not front a
customer's property, the utility company will pay for water main line extension if
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the cost does not exceed $500 per service connection. Where the cost exceeds
$500 per connection, the customer shall incur the additional cost calculated using
cost of installing an S" inside diameter main, and enter into Main Extension
Agreement with the utility. See fl 64
Is the contribution provided to the company typically a large or small
amount?
Contributed property or payments made to SUEZ are based on the scope of the
construction project, number of customer connections, and ffiastructure required
to provide utility service to those customers. The range of CIAC provided to
SUEZ for projects completed during the period from 2016 through March 2020
ranged from $4,700 to nearly $1,570,000, with an average contribution amount of
$128,510 (see Cooper Direct, Exhibit 2).
How has CIAC historically been treated for purposes of ratemaking for
water utilities?
The CIAC contributed amount (or any property acquired or consfucted with the
amount) is not included in the utility's rate base for ratemaking purposes. The rate
base investment that the utility company is allowed to earn a return on is reduced
by the amount of contributed property. The contributions remain on the books of
the company as a permanent confra-asset, depreciated at the same rate as the
associated plant facility. When the associated plant is retired and removed from
service, the related contibutions remain and continue amortizing at the same rate.
How has CIAC historically been treated under the federal tax code for water
utilities?
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Under the Tax Reform Act of 1986, contributions in aid of construction were
designated as taxable income to utility companies. Subsequently, the Tax Reform
Act of 1996 enacted an exemption that made water and sewer utilities exempt
from recording CIAC as taxable income. The Tax Cuts and Jobs Act of 2017
(TCJA), which reduced corporate income tax rates, also eliminated the 1996
exemption from taxable income for CIAC. As of January 2018 the TCJA required
water and sewer utilities to once again incur income tax on contributed or
advanced property.
What has the IPUC done in response to the changes to the tax code you have
just described?
On December 16, 1987, the Commission issued OrderNo. 21660, which initiated
an investigation into the treatrnent of CLAC and requested regulated utilities to
recommend methods of treating the associated CIAC tax for rate making
purposes. Based on the individual aspects of each utility company, the
Commission Order declined to set a standard policy for all utilities and instead
allowed utilities to adopt one of several different methodologies. These included:
l) charging its shareholders the additional expense for the tax on the CIAC with
no impact to utility customers (as proposed by Pacific Power and Light
Company); 2) small water and telephone utilities could utilize a full grcss-up
method whereby the person making the contribution would pay the full tax
obligation on the contribution. The utility would depreciate the contribution for
tax purposes and pass through that benefit to ratepayers; 3) Boise Water
Corporation (now SUEZ), as the only "large" water utility, was authorized to
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enter into escrow agreements with developers (see Order No. 20955); 4) for co-
generators and small power producers, the net present value method was used, in
which the contributor was given the benefit of the net present value of tax
depreciation. Under this method, no residual is absorbed by the utility or
ratepayers.; and 5) other utilities were allowed to ffeat the income tax paid on
contributions in aid of construction as rate based and charge it to the ratepayers
over time. Another method considered but not adopted, was proposed by
lntermountain Gas Company. It proposed that CIAC be grossed-up for net present
value of the revenue requirement for rate base treatment of the tax on the
contribution.
In20l7, when the 1996 CIAC exemption was eliminated, the Commission issued
Order 33965 in Case No. GNR-U-18-01. This Order required regulated utilities to
account for the financial benefit of the TJCA tax rate reduction as a deferred
regulatory liability and to file a report with the Commission identifying and
quantiffing all tax changes, and propose appropriate tariffchanges.
Describe SUEZ's filing and IPUC Order addressing the most recent change in
tax code.
In March 2018 SUEZ filed its report with the Commission in response to Case
GNR-U-18-01 Order 33965, regarding the impact of the tax law changes on the
cost and rates of the Company and proposed to address deferred tax liabilities in a
future general rate case. The Company also sought Commission approval to
gross-up contributed property for the new CIAC income tax obligation.
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Effective June 1,2018 in case GNR-U-18-01, OrderNo. 34074, SUEZ received
authorization by the Commission to decrease its rates by 52,722,791 or 5.6%o and
to gross-up its CIAC calculation for the tax obligation. The calculated 21.56%tax
gross-up to be collected from developers was based on the difference between the
tax cost to the utility less the present value of the future tax benefits of
depreciation expense deductions associated with contibuted property.
What impacts have these approved changes to SUEZ's tariff regarding CIAC
and related tax obligation had on SUEZ customers?
As the Company has subsequently learned, the TJCA has dramatically impacted
development and imposed a tax on utility companies for all contributions received.
Also, because the taxability of CIAC does not impact publicly-owned municipal
water companies, public utilities are at a competitive disadvantage in attracting
growth within its service area. As a result, builders are burdened with the tax on
CIAC. SUEZ believes this is driving housing and construction costs higher and
that those costs are being passed on to home buyers. All else being equal,
developers have a disincentive to undertake projects in public utility service areas
because passing the CIAC tax cost to developers adds additional development costs
to each construction project. SUEZ has experienced such situations, which are
described in Witness Cooper's direct testimony and Exhibit 3. This also has a
detrimental effect on existing public utility customers because absent development,
there are fewer new customers to help absorb costs.
To avoid incurring this added CIAC tax cost, developers may opt to form and
operate their own small water systems which will have significant ramifications in
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the future as they will face water quality regulation changes and may not have the
funding necessary to keep investing in the facility infrastructure, maintenance, and
replacement.
What is the current CIAC tax requirement in the SUEZ tariff?
Based on Order 34074 effective June 2018, SLJEZ began collecting the2l.56%otax
gross-up on CIAC from developers and incuning a CIAC tax liability from January
2018.
What change(s) is the Company requesting?
While contributions remain taxable under Federal tax law, to prevent impediments
to future development within SUEZ's service area and keep customer costs low,
the Company is proposing to adopt the "no CIAC tax gross-up" method. Under this
approach, SUEZ would pay the taxes on CIAC instead of collecting the funds to
pay the tax from developers. The income tax effect will be recorded in the
accumulated deferred income tax (ADIT) accounts which will reduce ADIT in
future rate cases. Future tax depreciation funded by non-grossed up CIAC will
cause the deferred tax asset to reverse over its tax life, increasing ADIT liabilities
as the tax benefit of the additional depreciation is realized over time. This future
depreciation reduces current tax expense and incrementally reduces the revenue
requirement in future rate cases.
The associated tax on CIAC would be included in rate base and the deferred tax
balances would be amortized over a proposed Zl-year period.
What would be the wording of a revised tariff?
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l) SUEZ's tariff pages Sheet 26 will be modified to remove Section 85 and also the
Tax Gross-up Factor Template.
2) Remove "income tax," reference from Water Main Extension Agreements,
sections 2and 3, Sheets 27,33 and 36:
3) Remove "income tax," from for Non-Contiguous Water System Agreements
section 4, Sheet 43 and from section 6 on Sheets 44 and 45:
These tariff changes are reflected in Exhibits A and B to SUEZ's Petition filed
contemporaneously herewith, which include an underline and strikeout version of
the affected portions of SUEZ's tariff (Exhibit A) and a clean version of the tariff
showing the proposed changes incorporated (Exhibit B).
What are the benefits to existing customers of the requested changes?
Based on the Company's analysis of developer-funded construction projects from
2016 forward (see Witness Cooper's direct testimony and Exhibit l), the average
annual revenue from development projects was more than sufficient to cover the
revenue requirement of the CIAC tax obligation, as well as the added incremental
operating cost for serving those customers. SUEZ believes that if the Company
pays the tax obligation on CIAC rather than collecting it from developers that will
remove a barrier for growth and help keep customer charges low. Because growth
is self-sustaining and benefits existing customers by spreading costs over a larger
customer base, and because of its experience post-TCJA implementation, the
Company asserts that requiring developers to fund the utility's tax obligation for
CIAC is ultimately detrimental to SUEZ's existing utility customers.
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This proposed change will not harm and will ultimately benefit customers because
the revenue generated by these developments more than offsets the revenue
requirement of the tax if paid by the Company.
How will developers already in the process be treated? Will there be any
"refund" of gross-up previously collected from developers?
The Company is proposing to cease grossing-up contributed property at the
effective date of the Commission's Order authorizing this change. The date the
CIAC becomes taxable is the date of the ffansfer of ownership to SUEZ, so for
projects that are not closed as of the effective date of a Commission Order
authorizing the change, the gross-up would be refunded. For those projects that
have closed before such an Order and the tax liability to SUEZ has accrued, the
gross-up would be retained. Otherwise, the proposed changes would impact only
future development projects going into service after the effective date of the
Commission's Order and so long as the existing tax laws remain in effect.
Additionally, even though the Company's CIAC income tax obligation began at the
beginning of 2018, the Company was not authorized to collect tax on contributions
between January and June 2018. The Company is not seeking to collect any tax
retroactively from developers. The tax collected to date will offset the Company's
associated CIAC tax obligation.
What is the estimated average annual CIAC tax collected and how would this
impact SUEZ's current customers?
Depending on the development activity and construction projects initiated, SUEZ
received between $5M and $8M in CIAC contributions annually, since 2014.
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Using the existing 21.56% tax gross up rate on conffibutions, the associated tax
obligation collected would range between $lM and $2M annually. A $2M average
annual CIAC tax obligation compared to a rate base investnnent of $180M is
approximately lo/o. The average annual revenue from the 2016 - March 2020
completed developer construction projects using a 2019 average revenue by meter
size, was $ 16,055 and is approximately 5 times higher than the approximate $3,200
revenue requirement needed for CIAC tax (see Witness Cooper's Exhibit 2). Based
on this analysis, development growth and the revenue it generates is more than
sufficie,lrt overall to cover the revenue requirement for the CIAC tax obligation
when paid by the Company. By removing this barrier for growth, current customers
will benefit from an increase in future projects.
Does this conclude your testimony?
Yes.
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